Managing Director s review Chairman of the Board s review Board of Directors report Profit and loss Balance sheet Off-balance-Sheet Commitments Notes to the accounts Key indicators Financial result for the year and disposal of profits Auditors report Municipality Finance offers funding on market terms to municipalities, municipal federations and organizations owned or controlled by those, and housing corporations that serve the public good, by raising funds on the Finnish and international capital markets at a very competitive cost. The activities of Municipality Finance are based on precisely defined operating policies and the excellent credit worthiness of the Finnish municipalities. Our aim is to safeguard the current strong credit worthiness and to utilise it to the best of our ability, in order to create competition and thus keep the financing cost of the municipalities at a competitive level. We are not looking to maximise profits and only small positive margin is charged over the cost of funds. According to the operation policies set by the board of directors, sufficient own funds has to be generated through own operations to enable possible growth of the balance sheet.
Managing Director s review In 2002 Municipality Finance concentrated on developing its core business and customer service in both funding and lending. Considering trends on funding and lending markets, it is clearer than ever that the merger of the old Municipality Finance and Municipality Housing Finance came at exactly the right moment. The new Municipality Finance is a stronger player on the funding market, and can also serve its borrowers more comprehensively. Lending to municipalities still growing Municipality Finance lending continued brisk all year and the company maintained its strong standing as a lender to the municipal sector and non-profit housing corporations. It won altogether EUR 774 million of the offers it made, i.e. about 37%. EUR 770 million in loans were withdrawn during the year, that is, nearly 40% more than in 2001. Loans were granted to borrowers in 173 municipalities. The entire Municipality Finance loan portfolio grew by 11%, to EUR 3.4 billion. The growth of the loan portfolio derived from the municipalities increasing need to cover their investments by borrowing. The weak competitiveness of the State housing loan system (ARAVA) amid low market interest rates also made loans from Municipality Finance and other financial institutions serving the municipal sector more attractive as municipalities converted their ARAVA loans into cheaper loans on market terms. Municipality Finance lending is likely to continue growing in 2003 despite declining municipal investment. According to an Association of Finnish Local and Regional Authorities estimate, borrowing by municipalities (excluding municipal federations) will increase by 10-15% in 2003. At the end of 2002 Municipality Finance had longterm loans outstanding in 342 municipalities, which represents 82 % of members of the Municipal Guarantee Board. Funding is the biggest challenge in 2003 Municipality Finance achieved the targets set for funding in 2002, though acquiring competitive long-term funding on international capital markets became more challenging with interest rates so low. Municipality Finance s estimated need for funding in 2003 is around EUR 1 billion. The year s biggest challenge will be to pursue its own and Finnish municipalities interests on the international funding market, where Municipality Finance is still only a minor player. The fact that the Finnish municipal sector enjoys good credit ratings will be a crucial competitive asset, and remain the foundation of the company s funding operations. Succeeding in such a challenging environment will mean increasing recognition of Municipality Finance internationally and actively collaborating with the Nordic and international partners. Interest rates are not expected to start rising until the end of 2003 at the earliest. Before that, the European Central Bank may even cut the bank rate in view of the poor economic prospects for the euro zone. One element in this uncertainty is apprehension about future developments in the Iraq situation. Helsinki, February 5, 2003 Pekka Averio Managing Director
Chairman of the Board s review Municipal finances were fairly well balanced in 2002, but have moved into deficit in 2003, a situation expected to continue over the next few years. Growth in tax revenues came to a halt in 2002, and in 2003 a fall of well over five per cent is predicted. Despite slower economic growth, the municipalities must be able to cope with their growing statutory obligations. Any hopes they may have of boosting their tax revenues by raising the municipal tax rate are somewhat undermined by the increase made in the earned income deduction in municipal taxation, for instance. Bookings of corporate tax by municipalities fell nearly 40% in 2002. There were several causes, including poorer business performance and the municipalities smaller share of revenues and VAT levies. Investment can only fall so far Municipal investment peaked in 2001. Though the total figure fell to only some EUR 2 billion in 2002, the municipalities need for borrowing was growing at the same time. Necessary maintenance and renovation investments and rising pressure for more services in municipalities with net migration inflow mean that investment can only be cut so far. The level is in fact unlikely to fall much over the next few years. The municipalities shrinking income base will naturally be felt at Municipality Finance. Already, demand for its loans has increased. At the same time, pressure is growing on the company to increase its funding on behalf of Finnish municipalities. Municipality Finance safeguarding its competitiveness Municipality Finance has proved its importance as an instrument of the municipalities. The company implements its mission as an active source of finance, creating competition merely by its existence. The financial institutions supplying municipalities in fact already operate on very narrow margins. Municipality Finance s ability to continue serving the municipalities is tied up with the competitiveness of its financial products and other services. With support from its owners, profitable operations, internal development and a constant drive for greater efficiency will ensure Municipality Finance s future competitiveness. There is a mood of anticipation in municipal housing construction. The present Government or at the latest the Government that assumes office after the elections in March must speed up social housing production by putting better terms for financing State-subsidized housing on its agenda. On behalf of the Municipality Finance Board, I should like to thank our staff, customers and stakeholders for the contribution they have made to achieving the company s goals and ensuring its future development. Helsinki, February 5, 2003 Risto Parjanne Chairman of the Board
Board of Directors report 2002 was the new Municipality Finance Plc s first full year of operation. The merger in 2001 between Municipal Housing Finance Plc and the old Municipality Finance Plc came exactly at the right time. Municipality Finance is now a stronger player on the funding market and the company can also serve its borrowers more comprehensively than before. The new company created in the merger started operating on May 1, 2001. The first full financial year (January 1 December 31, 2002) showed a net operating profit of EUR 3.1 million. The EUR 2.8 million written up for the 2001 calendar year comprised the new Municipality Finance s net operating profit of EUR 1.8 million for May 1 December 31, 2001 and the net operating profit recorded by the merging companies for January 1 April 30, 2001. The Municipality Finance balance sheet total on December 31, 2002 was EUR 4,156.7 million, compared with EUR 3,769.0 million at the end of the previous year. This was an increase of 10%. Lending In this article: Lending Funding Risk management Capital adequacy and own funds Credit ratings Operating result Other events in 2002 Prospects for 2003 Personnel and administration Lending portfolio by reference rate 31 Dec 2002 Long-term lending Municipality Finance s borrowers are municipalities and municipal federations, organizations owned or controlled by them, and non-profit housing corporations. The company s loan products comprise loans to municipalities, municipal federations and municipal enterprises, and housing loans for new production, renovations and acquisitions. Some Municipality Finance loans are refinanced by the European Investment Bank (EIB) or the Council of Europe Development Bank (CEB).
Municipal finances deteriorated in 2002, increasing the demand for longterm lending. Demand for housing loans was boosted by the conversion of State housing loans (ARAVA) into loans at market rates, partly because these rates were so low and partly because of structural problems with the ARAVA system. Requests for offers received by the company involved some 300 municipalities for a total of EUR 2.1 billion (2001: EUR 1.3 billion). The changes made in 2002 in the interest subsidy system for housing production did not boost demand for interest-subsidized loans as much as expected. Construction of some 2,500 rental and right-of-occupancy units began with interest subsidy, compared with 3,700 in 2001. Municipality Finance lending continued to be brisk all year and the company maintained a strong standing as a lender to the municipal sector and non-profit housing corporations. It won altogether EUR 774 million (c. 37%) of the competitive offers it made. Municipalities and municipal federations accounted for EUR 381 million of this, municipal enterprises for EUR 74 million, and housing corporations for EUR 319 million. The Municipality Finance loan portfolio stood at EUR 3,403.1 million at the end of 2002 (2001: EUR 3,061.7 million). Altogether EUR 770.0 million in loans was withdrawn (2001: EUR 555.7 million), an increase of 39%. As EUR 428.4 million in loans matured in 2002, this meant an 11% net increase in lending. Loans were granted to borrowers in 173 municipalities. A customer satisfaction survey was commissioned in spring 2002, in which Municipality Finance customers assessed the company s products and services. Municipality Finance gained a consistently good rating of 5.5 (on a scale of 1-7) in the key areas surveyed, i.e. products and services, analysis of financial needs, and financing solutions and customer service and customer relations. Municipality Finance is judged necessary as an alternative to other financial institutions. Its loan and service provision is considered important, and much is expected of its future development. Municipality Finance was felt to be a professional, dynamic and approachable company. Most customers believed its standing would strengthen in future. There were no significant regional differences in the assessment of Municipality Finance s operations. Its products and services also won a consistently good rating in a comparison based on population. Lending by borrower types 31 Dec 2002 Short-term lending Municipality Finance also supplies municipalities and municipal federations with municipal commercial paper to meet financial needs of under a year, which they can issue via Municipality Finance. At the end of 2002, 243 municipalities and municipal federations were using the programme, which at that point totalled EUR 895.4 million. Customers acquired altogether EUR 651.5 million (2001: EUR 772.5 million) in short-term financing this way. Changes were made in the programme during the year in order to simplify its use and administration.
In 2002 Municipality Finance began to offer municipal commercial paper to corporations controlled by municipalities and municipal federations. They can use it for instance to finance housing production during construction efficiently and flexibly, or to meet other current needs. Marketing of this product will get fully under way during 2003. Total lending 1998-2002 < Back to top Funding Municipality Finance acquired a total of EUR 715.9 million (2001: EUR 236.0 million) in long-term funding in 2002. This was much less than in 2001, partly because the merging companies had acquired considerable funding in advance in preparation for the merger and because they combined their balance sheets. When the books were closed the company s joint funding stood at EUR 3,983.4 million. Of this, 62% was in euros and 38% in other currencies. Long-term funding sources 2002 Modes of funding Most Municipality Finance funding is through the following debt programmes: International funding, EMTN programme, EUR 1.500 million Domestic debt programme, EUR 500 million Treasury Bill Programme (KVS programme), EUR 300 million. In May Municipality Finance raised its EMTN programme from EUR 1,000 million to 1,500 million. The programme is listed on the London Stock Exchange. Municipality Finance uses credit limits agreed with the European Investment Bank and Council of Europe Development Bank (CEB) as part
of its refinancing. Municipality Finance funding is guaranteed by the Finnish Municipal Guarantee Board, so the debt instruments it issues are weighted as zerorisk under Finnish law for capital adequacy purposes. About 20% of all funding took place outside the programmes in 2002. International funding In 2002, more than 60% of the long-term international funding was secured through the EMTN programme. 67% of this funding was eurodenominated, with maturity ranging from 1 year to 30 years. An important part of the funding comprised structured loans issued in Japan, which allowed the company to offset the higher costs of euro-denominated funding. After an interval of a few years, the company also issued an Uridashi bond in Japan within the EMTN programme. This Australiandollar bond was targeted at private investors. In addition, the company successfully issued a number of other bonds in Europe. Domestic funding Within its domestic debt programme Municipality Finance issued seven Municipal Bonds to a total subscription value of EUR 81.2 million during 2002. Five of these were targeted at the general public and two were index-tied loans for wholesale investors. A change-over was made to the book-entry system from the beginning of 2002 in issuing Municipal Bonds, as it has proved both functional and reliable. Competition has cut the costs of related services, so the move was also justified financially. Coupon redemption services for old bearer-form Municipal Bonds have been outsourced. Municipality Finance signed a cooperation agreement with Nordea Bank Finland Plc under which Municipal Bond customers have been able to redeem the interest and principal of Municipal Bonds at Nordea branches from the beginning of 2002 onwards. Short-term funding For short-term funding the company has a Treasury Bill programme (KVS). On December 31, 2002, issues of such current funding totalled EUR 276.5 million (2001: EUR 188.9 million). All in all, Municipality Finance debt instruments issued during the year totalled EUR 893.0 million. Short-term funding is used to secure overall liquidity. It is also the main source of funding for municipal commercial paper. Long-term funding by currencies 2002 < Back to top Risk management Municipality Finance takes minimal risks. Market-related risks are hedged mainly with interest rate swaps, cross-currency swaps and forward rate
contracts. The company uses risk management software to monitor its counterparty, interest rate and currency risks. It has set credit rating criteria and internal risk limits for its contract counterparties. Derivative contracts are used solely for hedging. Risk management is efficiently arranged at Municipality Finance. The general principles are decided on by the Board of Directors and implemented by the Managing Director assisted by the Board of Management. Actual risk management and related supervisory functions are separate. The company s risk standing is monitored regularly by the Board of Management and by the Board of Directors, on the basis of regular reporting on use of credit limits. Several overlapping methods are used to manage interest rate risks, ranging from conventional duration analysis and sensitivity analysis to value-at-risk analysis, calculated using 99% probability over ten days, as recommended by the BIS. The resulting VAR figure based on historical analysis averaged EUR 937,198 during the year. The company is also protected against exchange rate risks. In principle, all funding in foreign currencies is converted into euros through derivative contracts. Loans can be granted to municipalities and municipal federations without separate collateral. For other loans, an absolute guarantee or deficiency guarantee issued by a municipality or a municipal federation, or a State deficiency guarantee, is acceptable. Because such security is required, the loans granted are calculated as zero-risk for purposes of calculating the company s capital adequacy. Every effort is made to reduce refinancing risk by coordinating funding and lending maturities, and by spreading funding over several different market areas. At the end of the year, the company s refinancing risk, calculated using average lending and funding periods, was 3.56 years. The company has access to altogether EUR 100 million in arrangements to safeguard its liquidity. Municipality Finance reports regularly on its operations to the Financial Supervision Authority, the Bank of Finland, the European Central Bank, the Municipal Guarantee Board and Statistics Finland. < Back to top Capital adequacy and own funds Municipality Finance s capital adequacy on December 31, 2002 was 63.44%. Share capital stood at EUR 16.5 million and own funds at EUR 84.1 million. Capital adequacy 1998-2002 (%) 1998 1999 2000 2001 2002 Municipality Finance Plc 49* 84 63 Municipality Finance Plc (old) 84 45 38 Municipal Housing Finance Plc 109 114 63 *Old Municipality Finance Plc and Municipal Housing Finance Plc combined. The companies merged and the new Municipality Finance Plc started operating on May 1, 2001. The company has not accumulated any non-performing assets or credit losses during its operations, and this also applies to the merging companies. < Back to top Credit ratings The credit ratings of the company s long-term funding are as follows:
Moody's Investors Service Aaa (Verified 21 Dec 2001) Standard & Poor's AA+ (Verified 10 Dec 2001) Its short-term funding enjoys the highest ratings possible: Moody's Investors Service P1 (Verified 21 Dec 2001) Standard & Poor's A-1+ (Verified 10 Dec 2001) < Back to top Operating result Municipality Finance s financial performance was good, and it showed a net operating profit of EUR 3.09 million. It made voluntary provisions totalling EUR 3.06 million, and showed a profit for the year of EUR 2,566.02. The combined net operating profit for January 1 December 31, 2001, comprising the merged companies profits for January 1 April 30 and the new company s profits for May 1 December 31, totalled EUR 2.79 million. Net income from financial operations for the financial year was EUR 9.96 million (2001: EUR 9.90 million). This includes EUR 450,249 in reversals of capitalizations comprising accruable items entered in the balance sheet as accrued expenses and deferred income on nettings of interest rate swaps in 1997-1998. The aim here was to standardize the accounting practices of the merged companies. The net income of EUR 205,018 (2001: EUR 231,805) from securities transactions and foreign exchange dealing comprised profits from the sale of negotiable instruments. Assets from advance funding were invested in these instruments before the money was issued in loans to customers. Among expenses on fees, EUR 59,641 in management fees entered as deferred liabilities was released in order to standardize accounting practices. < Back to top Other events in 2002 2002 was a busy and eventful year. The heavy demand for lending meant funding had to be successful in terms of both price and maturities. In the first half, procedures for the new company s internal functions were created and adjusted, the most error-free and efficient administration of agreements was ensured throughout, and the organization was trimmed to meet the company s needs in every respect. Municipality Finance s internal auditing was outsourced, and placed in the hands of the Suomen Tilintarkastuskeskus Oy authorized accounting company. Two internal audits were carried out in 2002, on funding and company reporting. In March the company moved into new facilities in Aleksanterinkatu, Helsinki. This placed all operations under the same roof, with sufficient space to meet the company s needs for several years forward. With the move, data security and the operational reliability of IT were also upgraded. < Back to top Prospects for 2003 The main challenges to be faced in 2003 concern the maintenance of adequate funding, lending volumes and satisfactory profit margins on today s tougher market. Funding is expected to remain demanding as regards both volume and target pricing. The municipalities net margin for the year is expected to deteriorate to some EUR 1.0 billion. This will not be enough to cover their annual investments of around EUR 2 billion, or even the year s EUR 1.6 billion in
depreciations. Gross investment is expected to decrease, though the need remains great. The total loan portfolio of the municipalities and municipal federations is expected to rise some 10-15% a year between 2003 and 2006, with gross borrowing at around EUR 1.4 billion and net borrowing at EUR 0.7 billion this year. Companies and corporations controlled by municipalities and municipal federations are also big borrowers. The maximum authorization for approval of interest-subsidized loans in the 2003 State Budget is EUR 670 million (2002: EUR 450 million). Changes in the various systems of State housing subsidy and trends in construction costs and interest rates will affect future demand for housing loans. The company s most important targets for 2003 are as follows: to further develop profitable core business to prepare for IAS accounting and to further improve IT systems and data security. < Back to top Personnel and administration During the financial year Municipality Finance had an average of 27 employees. Total salaries, fees, pension costs and other staff-related costs paid out during the financial year for the Managing Director, his Deputy, and members of the Board of Directors came to EUR 381,567. The Board of Directors comprises the following: Risto Parjanne (Managing Director, Association of Local and Regional Authorities) as Chairman Timo Honkala (Deputy Mayor, City of Helsinki) as Vice Chairman, Juhani Alanen (Deputy Mayor, City of Mikkeli) Birgitta Kantola (Master of Laws, Helsinki) Esa Katajamäki (Director of Finance and Planning, City of Oulu) Jouko Lehmusto (Director of Administration, City of Turku) Kari Nars (D.Sc. (Econ & Bus.Adm.), Helsinki) Raija Peltonen (Municipal Manager, Municipality of Hartola) Seppo Perttula (B.Soc.Sc., Helsinki) The company s Managing Director is Pekka Averio and the Deputy Managing Director Jukka Reijonen (Finance). The Board of Management includes: Harri Hiltunen, Director, Credits and Marketing Marjo Tomminen, Director, Financial Administration Jarkko Vuorenmaa, Director, IT and Back-office The company auditors are Arthur Andersen Oy, with Jarmo Lohi, Authorized Public Accountant, as senior responsible auditor. < Back to top << Back
Profit and loss EUR Pro forma* 1 Jan - 31 Dec 2002 1 Jan - 31 Dec 2001 Interest income 146 536 464.85 188 170 541.37 Net income from leasing operations 3 472.88 2 484.27 Interest expenses -136 576 732.19-178 275 764.67 NET INCOME FROM FINANCIAL OPERATIONS 9 963 205.54 9 897 260.97 Commission income 2 093.06 3 100.55 Commission expenses -2 041 865.18-1 767 686.72 Net income from securities transactions and foreign exchange dealing 205 018.18 231 805.14 Other operating income 0.00 1 670.33 Administrative expenses Staff costs Salaries and fees -1 366 570.64-1 511 117.90 Staff-related costs Pension costs -233 780.33-233 379.87 Other staff-related expenses -106 004.48-138 807.06 Other administrative expenses -1 461 141.94-1 444 713.03 Total administrative expenses -3 167 497.39-3 328 017.86 Depreciation and write-downs on tangible and intangible assets -340 976.50-336 561.83 Other operating expenses -1 527 082.03-1 910 579.58 NET OPERATING PROFIT 3 092 895.68 2 790 991.00 PROFIT BEFORE APPROPRIATIONS AND TAXES 3 092 895.68 2 790 991.00 Appropriations -3 063 000.00-2 740 442.30 Income taxes -27 329.66-45 627.20 PROFIT FOR THE FINANCIAL YEAR 2 566.02 4 921.50 << Back
Balance sheet EUR ASSETS 31 Dec 2002 31 Dec 2001 Liquid assets 3 359 282.11 2 727 515.69 Debt securities eligible for refinancing with central banks 384 680 395.26 325 476 072.70 Claims on credit institutions Repayable on demand 3 728 126.57 544 381.69 Other 83 052 712.24 6 971 754.43 Claims on the public and public sector entities 3 403 117 827.54 3 061 728 030.76 Leasing assets 3 034.56 23 207.65 Debt securities On public sector entities 91 597 328.05 112 952 270.58 Other 58 979 251.93 69 753 946.84 Shares and participations 24 219.06 1 156 654.56 Intangible assets 648 923.75 266 109.67 Tangible assets Other tangible assets 916 393.76 765 027.67 Other assets 65 557 225.16 131 738 462.46 Accrued income and prepayments 61 015 935.67 54 908 535.21 TOTAL ASSETS 4 156 680 655.66 3 769 011 969.91 LIABILITIES 31 Dec 2002 31 Dec 2001 LIABILITIES Liabilities to credit institutions and central banks Credit institutions Other 437 088 485.11 413 597 012.10 Liabilities to the public and public sector entities Other liabilities 114 341 630.00 0.00
Debt securities issued to the public Bonds 3 156 604 244.80 3 009 414 528.28 Other 275 395 441.64 188 064 317.14 Other liabilities 505 515.18 1 913 261.30 Accrued expenses and deferred income 81 874 037.12 68 217 115.30 Subordinated liabilities 33 818 792.65 33 818 792.65 APPROPRIATIONS Voluntary provisions 21 285 544.90 18 222 544.90 EQUITY CAPITAL Share capital 16 522 000.00 16 522 000.00 Other restricted reserves Reserve fund 276 711.01 276 711.01 Capital loans 18 050 201.60 18 050 201.60 Profit brought forward 915 485.63 910 564.13 Profit for the financial year 2 566.02 4 921.50 TOTAL LIABILITIES 4 156 680 655,66 3 769 011 969,91 Irrevocable commitments given in favour of a customer 160 316 094.00 166 258 127.00 << Back
Off-balance-Sheet Commitments Off-balance-Sheet commitments Commitments and security given Book value in final accounts (EUR 1,000) Bonds pledged to the Local Government Pensions Institution Debt securities pledged to the Local Government Pensions Institution 31 Dec 2002 31 Dec 2001 70 148 185 573 0 2 500 Bonds pledged to the Municipal Guarantee Board 2 407 147 2 064 493 Debt securities pledged to the Municipal Guarantee Board 440 533 386 039 Irrevocable commitments given in favour of a customer Binding commitments 160 316 166 258 Total values and countervalues of the underlying instruments pertaining to derivative contracts outstanding on the balance sheet date Values of underlying instruments (EUR 1,000) For hedging purposes 31 Dec 2002 31 Dec 2001 Interest-rate derivatives Futures and forwards 5 500 5 500 Interest-rate swaps 3 728 457 2 992 034 Currency derivatives Interest-rate and currency swaps 1 537 631 1 435 100 Share derivatives 103 209 65 189 Equivalent credit value of derivatives (EUR 1,000) (without netting) 31 Dec 2002 31 Dec 2001 Interest-rate derivative contracts 153 233 55 714 Currency derivative contracts 170 644 185 038 Share derivatives 8 770 12 061 Breakdown of interest-rate swaps, interest-rate and currency swaps and share derivatives using the counterparty s credit rating Equivalent credit values have been calculated by using mark-to-market valuations and netting. Nominal value Equivalent credit value Nominal value Equivalent credit value 1 000 EUR 31 Dec 2002 31 Dec 2002 31 Dec 2001 31 Dec 2001 AAA 1 337 416 27 417 1 335 129 26 483 AA 2 771 943 48 957 2 326 194 49 222 A 1 259 938 17 724 831 000 5 496
Derivative product risks according to rating categories (credit equivalent amounts) << Back
Notes to the accounts Notes to the accounts concerning the accounting principles applied Municipality Finance Plc balances its accounts in compliance with the relevant laws, and decisions and regulations issued by the Ministry of Finance and the Financial Supervision Authority. The company reports regularly on its operations to the Financial Supervision Authority, the Bank of Finland, the European Central Bank, the Municipal Guarantee Board and Statistics Finland. The profit and loss account and the balance sheet have been drawn up in accordance with models approved by the Financial Supervision Authority on June 30, 1998. Municipality Finance Plc started operating on May 1, 2001 following the combination merger of Municipal Housing Finance Plc and Municipality Finance Plc. Data related to the profit and loss account, the notes to the accounts and the key indicators refer to the consolidated figures of the merged companies (Municipal Housing Finance Plc and the old Municipality Finance Plc) for January 1 April 30, 2001 and the figures of the new company for May 1 December 31, 2001. The company s accounts have been drawn up in euros. Receivables and liabilities in foreign currencies have been converted into euros at the middle rate quoted by the European Central Bank on the balance sheet date. Exchange rate differences arising in the valuation process are included under the item Net income from foreign exchange dealing. Debt securities to be held up to maturity are entered under Fixed assets. The company s other debt securities are entered under Current assets. The difference between the acquisition price and the nominal value of debt securities is accrued under Interest income. The company does not have a trading reserve. The breakdown of debt securities into those eligible and non-eligible for refinancing with central banks was defined more clearly in 2002. The figures for 2001 have been adjusted to correspond to the new breakdown. The company practice in making entries of commissions resulting from borrowing is as follows: If the amount of a loan on a subscription date is less or more than the amount the company is required to repay on the maturity date, the amount of debt on the subscription date, adjusted by direct commissions resulting from borrowing, is entered in the balance sheet. Differences between the issue price and nominal values are broken down on a time basis over the maturity of the debt. Derivative contracts are made only for hedging purposes. The exchange rate valuations of the contracts are entered under Accrued income or Accrued expenses. The difference between annual interest income received and interest expenses paid is entered in the accounts as an adjustment to interest expenses from the hedged liability for the financial year in which the expenses occurred. Machinery and equipment are depreciated according to plan over five years using the straight-line method and IT equipment and software straight-line over four years. Office renovation costs are entered under Other long-term expenses and depreciated straight-line until the lease expires. Real estate is depreciated straight-line over 25 years. The planned depreciation was made on leased equipment, based on the length of the relevant leasing agreements. Notes to the profit and loss account All amounts in euros 1 Jan - 31 Dec 2002 1. Interest income, broken down as follows: - Claims on credit institutions 993 421 - Claims on the public and public-sector entities 152 830 869 - Debt securities 18 688 916 - Other interest income -25 976 741 Interest expenses, broken down as follows:
- Liabilities to the public 802 893 - Liabilities to credit institutions 14 254 626 - Debt securities issued to the public 143 558 842 - Subordinated liabilities 1 509 667 - Capital loans 780 531 - Other interest expenses -24 329 827 2. Net income from leasing, broken down as follows: - Rental income 23 646 - Planned depreciation -20 173 ----------------- 3 473 3. Net income from securities transactions, broken down as follows - Net income from transactions in debt securities 204 247 - Net income from transactions in shares and participations 9 744 4. Total values of securities held as current assets purchased or sold during the financial year: - Debt securities purchased 1 168 510 000 - Debt securities sold 89 000 000 5. Other operating income - Other income from the ordinary business of credit institution 2 093 Other operating expenses - Renting expenses 489 214 - Other expenses from the ordinary business of credit 1 037 868 institution 6. The profit and loss account item 'Depreciation and writedowns on tangible and intangible assets' consists of planned depreciation only. 7. Municipality Finance Plc has not incurred any credit losses or guarantee losses. 8. Municipality Finance Plc has no extraordinary income or extraordinary expenses. 9. Appropriations, broken down as follows: - Change in other voluntary provisions 3 063 000 10. Municipality Finance Plc has not made any obligatory provisions. 11. Municipality Finance Plc has not combined any items in the profit and loss under section 8, subsection 4 of the Ministry of Finance decision. 12. Municipality Finance Plc operates as a credit institution. The company's market area is Finland. Notes to the balance sheet 31 Dec 2002 13. The balance sheet item 'Debt securities eligible for refinancing with central banks', broken down as follows: - Government bonds 44 680 959 - Banks' certificates of deposit 126 950 128 - Other bonds 213 049 308
14. The balance sheet item 'Claims on credit institutions' does not include any claims on central banks. 15. The balance sheet item 'Claims on the public and publicsector entities' is broken down into sectors according to the official Statistics Finland classification system. - Enterprises and housing corporations 1 803 513 227 - Public-sector entities 1 544 041 980 - Non-profit organizations 55 562 621 All lending to enterprises, public-sector entities and non-profit organizations requires a guarantee or a deficiency guarantee from a municipality or a municipal federation or a State deficiency guarantee. No specific credit loss provisions were made for claims on the public and public-sector entities. 16. Municipality Finance Plc does not have any non-performing or other zero-interest assets. 17. Municipality Finance Plc has no collateral assets acquired to secure claims. 18. Municipality Finance Plc has no debt securities, debentures or other claims subordinated to the debtor's other debts. 19. Leasing assets Machinery and equipment 3 035 20. The total book value of securities entered under 'Debt securities' and 'Debt securities eligible for refinancing with central banks' is EUR 535 256 975. Quoted Others Debt securities - Securities held as current assets 22 427 809 474 016 076 - Other 22 358 268 16 454 822 The total amount of the difference between the estimated market value and the lower book value of securities held as current assets and entered under balance sheet items 'Debt securities' and 'Debt securities eligible for refinancing with central banks' is EUR 669 687. The total amount of the difference between the acquisition cost and the lower nominal value of securities held as fixed assets and entered under the balance sheet items 'Debt securities' and 'Debt securities eligible for refinancing with central banks' is EUR 585 113. The total amount of the book values of assets recorded in the balance sheet as 'Debt securities' and 'Debt securities eligible for refinancing with central banks' is broken down as follows: - Municipal commercial papers 83 032 358 - Certificates of deposit 126 950 128 - Other bonds 325 274 489 21. Shares and participations Quoted Others - Shares held as current assets 0 24 219 - Others 0 0 22. The balance sheet item 'Tangible assets' consists of machinery and equipment. Machinery and equipment Purchase price at the beginning of the financial year 780 528 + Acquisitions during the financial year 409 032 - Disposals during the financial year 173 847 - Planned depreciation during the financial year 188 095 + Accumulated depreciation from disposals at the beginning 113 970 of the financial year - Accumulated depreciation at the beginning of the financial 373 394 year
Book value at the end of the financial year --------------- 568 194 23. The item 'Intangible assets' broken down as follows: - Intangible assets 158 973 - Other long-term expenditure 489 951 24. Land and water areas and buildings entered under the balance sheet item 'Tangible assets' Used by the company Acquisition cost at beginning of period 375 390 + Additions during period 0 - Planned depreciation during period 9 695 - Accumulated depreciation at beginning of period 17 496 --------------- Book value at end of period 348 199 25. Municipality Finance Plc does not own any of its own shares and does not belong to any group. 26. The balance sheet item 'Other assets' broken down as follows: Derivatives 65 557 225 27. The item 'Accrued income and prepayment', broken down as follows: - Interest 60 360 569 - Other 655 367 28. The company has not combined any items in the balance sheet in accordance under section 8, subsection 4 of the Ministry of Finance decision. 29. Total difference between the nominal value and the lower book value of liabilities: Bonds 10 526 498 Other 1 788 332 Total difference between the book value and the lower nominal value of liabilities: Bonds 1 398 475 Other 0 30. Total book values of liabilities recorded in the balance sheet under the item 'Debt securities issued to the public', broken down as follows: Bonds 3 156 604 245 Other 275 395 442 31. Other liabilities, broken down as follows: - Cash items in the process of collection 0 - Other 505 515 32. Accrued expenses and deferred income, broken down as follows: - Interest 81 224 191 - Other 649 846 33. Municipality Finance Plc has no obligatory provisions. 34. Subordinated liabilities Municipality Finance Plc has issued a Euribor-based EUR 17 000 000 debenture. The loan has no maturity date. The issuer is entitled to repay the loan on May 18, 2006. In the issuer's enforcement and
dissolution procedures, the loan principal and unpaid interest are subordinated to commitments which do not have any such priority condition. The debenture cannot be converted into shares. The company has also issued a EUR 16 818 792.65 debenture. The nominal interest rate on the loan is based on the 6-month Euribor. The loan has no maturity date. The principal of both loans can be paid back only if the Financial Supervision Authority grants permission following an application from Municipality Finance. 35. Changes in various items under 'Equity capital' during the financial year Share capital Reserve fund Book value 1 Jan 2002 16 522 000 276 711 + Increases 0 0 - Decreases 0 0 Book value 31 Dec 2002 --------------- 16 522 000 --------------- 276 711 36. The shares of Municipality Finance Plc have not been divided into different types. 37. Non-restricted equity includes no non-distributable items. 38. The company did not launch any share issues or issues of options and convertible bonds during the financial year. 39. Ten largest shareholders in terms of voting rights and the number of shares held, their proportion of all Municipality Finance shares and of all votes attached to them, and the total number of shareholders. At a general meeting of shareholders, each shareholder may exercise a maximum of 15% of the total votes represented at the meeting. number percentage 1. Local Government Pensions Institution 7 021 850 42.50 2. City of Helsinki 1 925 000 11.65 3. City of Espoo 651 750 3.94 4. City of Turku 440 000 2.66 5. VAV Asunnot Oy, Vantaa 412 500 2.50 6. City of Oulu 385 000 2.33 7. City of Tampere 343 750 2.08 8. City of Joensuu 272 250 1.65 9. City of Kuopio 228 250 1.38 10. The Association of Finnish Local and Regional Authorities 202 125 1.22 The total number of shareholders on December 31, 2002 was 258. On January 1, 2003 the municipalities of Raahe and Pattijoki merged to form the new Municipality of Raahe and the municipalities of Hamina and Vehkalahti merged to form the new Municipality of Hamina. All four were Municipality Finance Plc shareholders. 40. Capital loans Principles concerning repayment of capital certificates and yield paid on them comply with section 38 of the Act on Credit Institutions. The capital loans (worth EUR 1 345 503.44) cannot be recalled, but the company may repay them with permission from the Financial Supervision Authority on condition that the company's own funds do not fall below the minimum level. Interest can be paid insofar as profit distribution in the credit company is possible and distributable funds are adequate, and the Board of Directors of the credit company so decides. Entitlement to pay interest is not carried over to future financial periods if no interest is paid on earlier periods. The Board of Directors has decided that no interest will be paid on 2002. The company has issued a EUR 12 500 000 capital loan. The interest rate is based on the 6-month Euribor. The company has agreed to pay interest only if the sum to be paid can be used for profit distribution according to the approved balance sheet for the company's previous financial year. The loan involves no cumulative right to interest. The loan has no maturity date, but the borrower can repay the loan on the call date, which is October 12, 2007. The loan can be repaid on condition that the restricted capital and other non-distributable assets on the approved balance sheet for the company's previous financial year provide full coverage. The Financial Supervision authority must also have granted permission for repayment of the loan. In addition, the company has a EUR 4 204 698.16 capital loan. The interest rate is based on the 6- month Euribor. The company has agreed to pay interest only if the sum to be paid can be used for profit distribution according to the approved balance sheet for the company's previous financial year. The loan involves no cumulative right to interest. The loan has no maturity date and can be paid back only on condition that the restricted capital and other non-distributable assets on the approved balance
sheet for the company's previous financial year provide full coverage. The Financial Supervision Authority must also have permission for repayment of the loan. Accrued interest at the end of the financial year has been entered under 'Interest expenses' in the balance sheet. 41. The company has not combined any asset items in the balance sheet under section 8, subsections 4 of the Ministry of Finance decision. 42. Maturity breakdown of claims and liabilities on the basis of remaining maturity 0-3 months 3-12 months 1-5 years over 5 years Debt securities eligible for refinancing with central banks 97 229 068 70 315 329 166 020 863 51 115 135 Claims on credit institutions 86 225 456 555 383 0 0 Claims on the public and public-sector entities 48 992 078 298 483 384 1 108 889 318 1 946 753 048 Debt securities 67 041 589 36 878 524 37 149 045 9 507 422 Liabilities to the public 3 729 723 54 793 996 195 138 688 183 426 078 Liabilities to credit institutions 0 0 0 114 341 630 Debt securities issued to the public 395 949 842 521 294 278 1 124 007 359 1 390 748 207 Municipality Finance Plc has no deposits other than fixed-term deposits. 43. Assets and liabilities broken down into items denominated in domestic and foreign currency In-currencies Foreign currency Debt securities eligible for refinancing with central banks 384 680 395 0 Claims on credit institutions 86 772 715 8 124 Claims on the public and public-sector entities 3 403 117 828 0 Debt securities 150 576 580 0 Other assets 65 557 225 0 Liabilities to the public 114 341 630 0 Liabilities to credit institutions 335 499 985 101 588 500 Debt securities issued to the public 2 005 010 902 1 426 988 784 Subordinated liabilities 33 818 793 0 Other liabilities 505 515 0 Notes to the accounts concerning income taxation 44. The company's voluntary provisions include deferred tax liabilities totalling EUR 6 172 808. The company pays income tax solely on its ordinary business operations. The company has no revaluations that affect income taxation. Notes to the accounts concerning collateral, contingent liabilities and derivative contracts 45. Liabilities and collateral Pledged bonds to the Local Government Pensions Institution 70 148 081 Pledged debt securities to the Local Government Pensions 0 Institution Pledged bonds to the Municipal Guarantee Board 2 407 146 843 Pledged debt securities to the Municipal Guarantee Board 440 533 008 46. The company's pension cover is arranged via an outside employment pension insurance company. 47. Municipality Finance Plc receives no leasing payments. The company has not sold any assets or leased them back.
48. Off-balance sheet commitments - Irrevocable commitments given in favour of a customer 160 316 094 49. The total values and the equivalent credit values of the underlying instruments pertaining to interest-rate and currency derivative commitments and other derivatives outstanding on the balance sheet date. Values of underlying instruments For hedging purposes Interest-rate derivatives Futures and forwards 5 500 000 Interest-rate swaps 3 728 457 280 Currency derivatives Interest-rate and currency swaps 1 537 631 029 Share derivatives 103 208 795 Equivalent credit value of contracts (without netting) Interest-rate derivative contracts 153 233 173 Currency derivative contracts 170 644 116 Share derivative contracts 8 770 221 50. Municipality Finance Plc has no sales receivables arising from the sale of assets on behalf of customers, nor accounts payable arising from the purchase of assets on behalf of customers. 51. Municipality Finance Plc has rent commitments worth EUR 314 844 to be paid during the next financial period and a total of EUR 645 710 to be paid later. 52. Municipality Finance Plc has not given any other contingent liabilities. Notes to the accounts concerning members of the administrative and supervisory bodies 53. During the financial year Municipality Finance Plc had 27 employees, two of whom were on maternity leave in 2002 while three were part-time employees. Total salaries, fees, pension costs and other staff-related costs paid out during the financial year for the Managing Director, his Deputy, and members of the Board of Directors came to EUR 381 567. An executive agreement was signed with the Managing Director and the members of the Board of Management in 2002. Municipality Finance Plc has an incentive scheme in which the goals and indicators are specified by the Board of Directors. The company did not grant any credits or sureties for members of the Board, the Managing Director, his Deputy, the auditor or the deputy auditor. The company has not made pension commitments to members of the Board, the Managing Director, his Deputy, the auditor or the deputy auditor. Holdings in other undertakings 54. Municipality Finance Plc has no holdings in other undertakings. Other notes to the accounts 55. Asset management services provided by Municipality Finance Plc Municipality Finance Plc provides its Municipal Bond customers with free safe custody, which includes the safekeeping of securities issued in paper form and payment of interest and principal directly into
customers' accounts. 56. Municipality Finance Plc is a public limited liability company. 57. Municipality Finance Plc is not part of any consolidated corporation and does not have any associated companies. << Back
Key indicators Key indicators describing the financial development of Municipality Finance Plc Comparison data * Municipality Finance Plc (new) 2002 2001 * 2000 * 1999 * Turnover, EURm 147 188 173 124 Net operating profit, EURm 3.1 2.8 3.2 3.1 % of turnover 2.1 1.5 1.8 2.5 Profit before appropriations and taxes, EURm 3.1 2.8 3.2 3.1 % of turnover 2.1 1.5 1.8 2.5 Return on equity (ROE), % 6.2 5.8 7.1 9.9 Return on assets (ROA), % 0.1 0.1 0.1 0.2 Equity ratio, % 1.2 1.3 1.2 1.0 Yield-expense ratio 1.4 1.4 1.5 1.6 Capital adequacy ratio, % 63.4 84.1 48.8 63.2 Head count, Dec 31 27 24 26 26 Municipal Housing Finance Plc Municipality Finance Plc (old) 1998 1997 1998 1997 Turnover, EURm 37 25 92 76 Net operating profit, EURm 2.1 2.0 2.3 0.1 % of turnover 5.8 7.9 2.5 0.2 Profit before appropriations and taxes, EURm 2.1 2.0 2.3 0.1 % of turnover 5.8 7.9 2.5 0.2 Return on equity (ROE), % 20.1 21.9 17.2 1.4 Return on assets (ROA), % 0.3 0.4 0.2 - Equity ratio, % 1.3 1.6 1.2 0.6 Yield-expense ratio 2.3 2.5 1.7 1.0 Capital adequacy ratio, % 109.1 226.6 84 24 Head count, Dec 31 8 7 17 14 These key indicators are not directly comparable with those related to other credit institutions. The objective of the company s operations is not to maximize profit but to lower municipalities financial costs by providing a joint municipal funding system. The comparison data above refer to the combined data on the merged companies (Municipal Housing Finance Plc and Municipality Finance Plc). Total turnover comprises both net income from interest, leasing operations, commissions, securities transactions and foreign exchange dealing, and other operating income. Net operating profit is entered as in the profit and loss account. Profit before appropriations and taxes is entered in the profit and loss account.
Net operating profit - taxes Return on equity ratio (ROE) = ------------------------------------------------------------------------ * 100 Equity capital + voluntary provisions minus deferred tax liabilities (average of year beginning and year end) Net operating profit minus taxes Return on assets ratio (ROA) = ------------------------------------------------------------------------ * 100 Balance sheet total (average of year beginning and year end) Equity capital + voluntary provisions minus deferred tax liabilities Equity ratio = ------------------------------------------------------------------------ * 100 Balance sheet total Net income from financial operations + dividends income + commission income + net income from securities transactions and foreign exchange dealing + other operating income Yield-expense ratio = ------------------------------------------------------------------------ Commission expenses + administrative expenses + depreciation + other operating expenses Own funds Capital adequacy ratio = ------------------------------------------------------------------------ * 100 Risk-weighted assets and off-balance-sheet items << Back
Financial result for the year and disposal of profits The company s financial statements show a profit of EUR 2,566.02. The Board of Directors proposes that this profit be carried over under unrestricted equity and that no dividend be paid out. Helsinki, February 5, 2002 MUNICIPALITY FINANCE PLC Risto Parjanne Chairman of the Board of Directors Timo Honkala Vice Chairman of the Board of Directors Juhani Alanen Board member Birgitta Kantola Board member Esa Katajamäki Board member Jouko Lehmusto Board member Kari Nars Board member Raija Peltonen Board member Seppo Perttula Board member Pekka Averio Managing Director